USCA1 Opinion

April 3, 1995
United States Court of Appeals
United States Court of Appeals
For the First Circuit
For the First Circuit
____________________
No. 94-2025
IN RE WINTHROP OLD FARM NURSERIES, INC.,
Debtor.
_____________________
WINTHROP OLD FARM NURSERIES, INC.,
Appellant,
v.
NEW BEDFORD INSTITUTION FOR SAVINGS, ET AL.,
Appellees.
____________________
APPEAL FROM THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF MASSACHUSETTS
[Hon. Richard G. Stearns, U.S. District Judge]
___________________
____________________
Before
Selya, Boudin and Stahl,
Circuit Judges.
______________
____________________

ERRATA SHEET
ERRATA SHEET
Please make
22, 1995.

the following change to

the opinion

issued on Ma

Page 3, first full paragraph, line 3 - change "far" to

"fair"

United States Court of Appeals

United States Court of Appeals
For the First Circuit
For the First Circuit
____________________
No. 94-2025
IN RE WINTHROP OLD FARM NURSERIES, INC.,
Debtor.
_____________________
WINTHROP OLD FARM NURSERIES, INC.,
Appellant,
v.

NEW BEDFORD INSTITUTION FOR SAVINGS, ET AL.,

Appellees.
____________________
APPEAL FROM THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF MASSACHUSETTS
[Hon. Richard G. Stearns, U.S. District Judge]
___________________
____________________
Before
Selya, Boudin and Stahl,
Circuit Judges.
______________
____________________

Stephen E. Shamban with whom Ann Brennan and Stephen E. Sham

___________________
____________
_______________
Law Offices, P.C. were on brief for appellant.
_________________
Richard M. Peirce with whom Roberts, Carroll, Feldstein & Peir
__________________
__________________________________
Inc. was on brief for appellees.
____
____________________
March 22, 1995
____________________

STAHL, Circuit Judge.

STAHL, Circuit Judge.
_____________
Old

Farm Nurseries, Inc.

Chapter 11 debtor

Winthrop

("Winthrop"), appeals the district

court order

affirming the bankruptcy

court's decision that,

to determine

the status of the claim

of undersecured junior

mortgagee

New

Bedford

pursuant to 11 U.S.C.
"Property")

Institution

for

Savings

("NBIS")

506(a), Winthrop's real property (the

should be valued at

its fair market

value.

We

shop

and

affirm.
I.
I.
__
BACKGROUND
BACKGROUND
__________
Winthrop

operates

retail

commercial landscaping business on

462 Winthrop Street in
2, 1993, Winthrop

Rehoboth, Massachusetts.

11 of the

Bankruptcy Code (the

Winthrop

filed

at

On February

relief under Chapter

"Code").

Disclosure

Reorganization (the "Plan").

will

the Property, located

filed a petition for

its

garden

On July

Statement

and

16, 1993,
Plan

of

The Plan provides that Winthrop

retain all of its assets except for the Property, which

is to be transferred to a new entity apparently controlled by

Winthrop's principal,
Winthrop.

which will

in turn lease

it back

to

Thus, under the Plan, Winthrop effectively retains

control of the Property and its use.

The Property

is encumbered by a

first mortgage in

the

amount of $287,000 held by

Northeast Savings, F.A., and

by tax liens of approximately $20,000.

NBIS, the holder of a

-22

junior

mortgage

$576,000.

on

the

Property,

is

owed

approximately

The parties stipulated to a liquidation value for

the Property of $300,000 and a fair market value of $400,000.

Winthrop's Plan would transfer the Property to the new entity
free

and clear of all liens except for the Northeast Savings

mortgage.

The Plan

the liquidation

would "strip down" the NBIS

value of the Property,

entirely

unsecured.

The

cents on

the dollar

over a

creditors,

whose

leaving NBIS's claim

Plan proposes
four-year

claims,

mortgage to

a payout

of twenty

period to

unsecured

including

NBIS's,

total

approximately $756,761.
NBIS
Property

objected

should

liquidation

value.

be

to

valued

the

Plan,

claiming

at

fair

market

that

the

value,

not

If the Property is valued at fair market

value,

NBIS

would have

approximately

$100,000,

a secured

claim

with

remainder

the

in the

amount of

of its

claim

unsecured.
The
holding

that

bankruptcy
fair

court,

market or

going

appropriate standard in valuing

debtor proposes to retain and
valued

the

Property

at

citing

line

concern

of

cases

value is

the

collateral that a Chapter 11

use, granted NBIS's motion and

$400,000.

The

district

court

affirmed, and Winthrop now appeals.

II.
II.
___
STANDARD OF REVIEW
STANDARD OF REVIEW
__________________

-33

"In
bankruptcy

an

court

appeal from
order,

district

we

court

independently

review of
review

a
the

bankruptcy court's decision, applying the `clearly erroneous'

standard

to

findings

of

fact

and

de

novo

review

to

conclusions of law."
F.3d 26,

Grella v. Salem Five Cent Sav. Bank, 42

______
_________________________

30 (1st Cir. 1994).

Thus, our review

The bankruptcy court's interpretation

question

of

law.

Its application

particular facts of this

and fact,
the

error."

court's

Williams v.
________

of

506(a) presents a
the statute

to the

case poses a mixed question

of law

subject to the clearly

bankruptcy

of

is de novo.

erroneous standard, unless

analysis
Poulos, 11
______

was

"infected

F.3d

271, 278

by

legal

(1st Cir.

1993).
III.
III.
____
DISCUSSION
DISCUSSION
__________
Section 506(a) governs the determination of whether
any portion of a

creditor's claim should be classified

secured claim:
(a) An allowed claim of
a creditor
secured by a lien on property in which
the estate has an interest, or that is
subject to setoff under section 553 of
this title, is a secured claim to the
____________________________
extent of the value of such creditor's
_________________________________________
interest in the estate's interest in such
_________________________________________
property, or to the extent of the amount
________
subject to setoff, as the case may be,
and is an unsecured claim to the extent
that
the
value of
such creditor's
interest or the amount so subject to
setoff is less than the amount of such
allowed claim.
Such value shall be
______________________

as a

-44

determined in light of the purpose of the

_________________________________________
valuation and of the proposed disposition
_________________________________________
or use
of
such property,
and
in
_____________________________
conjunction with any hearing on such
disposition or use or on a plan affecting
such creditor's interest.
11

U.S.C.

506(a) (emphasis

direct courts to choose

a

given

type

language

in

apparently did
liquidation

or

As

statute does not

evidenced

by the

second

sentence,

statute's

not intend
___
fair

The

any particular valuation standard in

of case.
the

added).

that

market

courts would

value

emphasized
Congress

use either

standard

exclusively,

envisioning instead a flexible approach by which courts would

choose

standard

to

fit

the

circumstances.

legislative history buttresses this notion.

Relevant

The House Report

states:
Subsection (a) of [ 506] separates an
undersecured creditor's claim into two

parts-he has a secured claim to the

extent of the value of his collateral; he
_______________________
has an undersecured claim for the balance
of his
claim.
"Value"
does
not
____________________
necessarily contemplate forced sale or
_________________________________________
liquidation value of the collateral; nor
_________________________________________
does it imply a full going concern value.
_________________________________________
Courts will have to determine value on a
_________________________________________
case-by-case basis, taking into account
_________________________________________
the facts of each case and the competing
_________________________________________
interests in the case.
_____________________
H.R.

Rep.

No.

595,

95th

Cong.,

reprinted in 1978 U.S.C.C.A.N.

_________ __
The

Senate

Report's

insight, but its commentary on

provides

for

356

(1977),

5787, 6312 (emphasis

added).

commentary

adequate

1st

on

Sess.

506

offers

little

361 -- the Code section that

protection

payments

to

secured

-55

creditors in

some circumstances -- is

further evidence that

Congress

intended

that

courts

would

sometimes

value

collateral at something greater than its liquidation price:

Neither is it expected that the
courts will construe the term value to
mean,
in
every
case, forced
sale
liquidation value or full going concern
value.
There is wide latitude between
those two extremes although forced sale
____________
liquidation value will be a minimum.
___________________________________
In any particular case, especially a
____________
reorganization case, the determination of
_________________________________________
which entity should be entitled to the
_________________________________________
difference between
the going concern
_________________________________________
value and the liquidation value must be
_________________________________________
based on equitable considerations arising
_________________________________________
from the facts of the case.
__________________________
S. Rep. No. 989, 95th Cong., 2d Sess. 54 (1978), reprinted in
_________ __
1978 U.S.C.C.A.N. 5787, 5840 (emphasis added).
commentary is not specifically
nevertheless relevant,

since a valuation for

necessarily

looks to

506(a)

amount

claim.1

of

addressed to

secured

for

Although this
506(a), it

361 purposes

a determination
Indeed,

is

since

of the
adequate

protection payments immediately deplete the estate's assets - even before it

is certain that a reorganization

be confirmed -- one would expect that the

plan will

valuation standard

used to determine whether

such payments are justified should

be extremely conservative.

See In re Case, 115 B.R. 666, 670

___ __________

____________________

1.

See United Sav. Ass'n of Tex. v. Timbers of Inwood Forest

___ _________________________
________________________
Assoc., 484 U.S. 365, 371-72 (1988) (stating that statutory
______
construction is a "holistic endeavor" and defining value of
"entity's
interest in
property" entitled
to adequate
protection under
361 and 362 in light of meaning of value
of "creditor's interest" in property under
506(a)).
-66

(Bankr. 9th Cir. 1990) (stating in dictum that in a valuation

for
be

adequate protection purposes,

assumed

logical").

and

deduction for

Nevertheless,

even in a

"forced liquidation would

selling

costs

would

be

the Senate language

suggests that

court might value

collateral at

361 context, a

something more than its liquidation value.

We have
number

of

not previously

courts, however,

considered this issue.

including four

Circuit Courts,

have adhered to this clear expression of congressional intent

and declined to
retain

based

value collateral that

on a

hypothetical

courts reason that because

to retain

a debtor proposes

foreclosure

sale.

the reorganizing debtor

to

These
proposes

and use the collateral, it should not be valued as

___
if it were being liquidated;
collateral

rather, courts should value the

"in light of" the debtor's

proposal to retain it

and ascribe to it its going-concern or fair market value with

no deduction for hypothetical costs of sale.2
____________________
2.

See, e.g., In re McClurkin, 31 F.3d 401, 405 (6th Cir.

___
____ _______________
1994) (holding that
506(a) "does not require or permit a
reduction in the creditor's secured claim to account for
purely hypothetical costs of sale" of Chapter 13 debtor's
residence); Matter of Rash, 31 F.3d 325, 329-31 (5th Cir.
_______________
1994) (holding that truck to be retained by Chapter 13 debtor
must be valued at
replacement cost to debtor because
foreclosure value fails to account for debtor's proposed use
of collateral); Lomas Mortgage USA v. Wiese, 980 F.2d 1279,
__________________
_____
1284-86 (9th Cir. 1992) (holding that second sentence of
506(a) precludes deduction of hypothetical costs of sale in
valuing Chapter 13 debtor's real property to be retained by
debtor), cert. granted and judgment vacated on other grounds,
___________________________________________________
113 S. Ct. 2925 (1993) (remanding for reconsideration in
light of Nobleman v. American Sav. Bank, 113 S. Ct. 2106
________
___________________
-77

Other courts, however, have chosen to read

506(a)

as requiring in virtually all cases a valuation of collateral

limited to the net amount a secured creditor could recover if
it

seized or foreclosed on the collateral and disposed of it

in accordance with

applicable state law.3

These courts tie

____________________
(1993));

In re Balbus, 933 F.2d 246, 252 (4th Cir. 1991)

_____________
(same); In re Case, 115 B.R. 666, 670 (Bankr. 9th Cir. 1990)
__________
(holding that for Chapter 12 plan confirmation purposes,
hypothetical costs should not be deducted from fair market
value in valuing collateral to be retained by debtor); In re
_____
Arnette, 156 B.R. 366, 368 (Bankr. D. Conn. 1993) (holding
_______
that motor vehicle to be retained by chapter 13 debtor
"should be valued at the price the debtor could get for it in
a free and open market, i.e. its fair market value"); In re
_____
Green, 151 B.R. 501 (Bankr. D. Minn. 1993) (valuing car to
_____
be retained by Chapter 13 debtor at retail, rather than
wholesale value); Matter of Savannah Gardens-Oaktree, 146
____________________________________
B.R. 306, 310 (Bankr. S.D. Ga. 1992) (using fair market value
to value apartment complex in Chapter 11 adequate protection
context); In re Usry, 106 B.R. 759, 762 (Bankr. M.D. Ga.
___________
1989) (in light of fact that Chapter 11 and Chapter 12
debtors plan to retain collateral to produce income, secured
claim equaled amount of stipulated fair market value without
deduction for hypothetical liquidation costs); cf. In re
___ ______
Davis, 14 B.R. 226 (Bankr. D. Me. 1981) ("Where a confirmed
_____
chapter 11 reorganization plan contemplates retention of the
collateral by the debtor for use in its ongoing business
operations, collateral . . . should be ascribed its fair
market value[,]" but reasonable costs of sale deducted in
valuing security interest) (Cyr, J.).
3.

See, e.g., In re Demakes Enters., Inc., 145 B.R. 362, 365

___ ____ ___________________________
(Bankr. D. Mass. 1992) (valuing meat processing plant at
liquidation value); In re Ledgemere Land Corp., 125 B.R. 58,
__________________________
61 (Bankr. D. Mass. 1991) (bank's mortgage on Chapter 11

debtor's real property that debtor intended to retain and

eventually develop "is worth only what [property] will bring
at foreclosure"); In re Robbins, 119 B.R. 1, 5 (Bankr. D.
______________
Mass. 1990) (valuing Chapter 11 debtor's investment property
at foreclosure value); In re T.H.B. Corp., 85 B.R. 192, 196
___________________
(Bankr. D. Mass. 1988) ("The fact that the Debtor is a going
concern is no reason to value the collateral under the going
concern standard unless it appears likely that the secured
party will actually receive that value from its collateral
-88

their

interpretation

to the

first

sentence

of

506(a),

reasoning that even if the debtor proposes to retain and make

profitable

use

enterprise,

the

of

the

statute

collateral

in

commands

the

reorganized

valuation

of

the

"creditor's interest" in the property -- i.e., of the lien -____

and

that value can only

entitled to recover from

law.

Thus, if

Commercial
it could

reflect what the

the collateral under non-bankruptcy

the collateral

Code, the creditor's

recover from

the U.C.C.;

if real

creditor would be

is

subject to

the Uniform

interest would reflect what

a commercially reasonable
estate, then from

sale under

a foreclosure

sale,

perhaps with some value

and the

added if the creditor has

wherewithal to bid-in, hold and

on the open market.

the right

resell the property

See, e.g., In re Tenney Village Co., 104

___ ____ ________________________

B.R. 562, 567 (Bankr. D.N.H. 1989) (valuing property

market value because

mortgage holder had

at fair

ability to bid

in

and obtain fair market value through later private sales); In

__
re Robbins,
___________

119

B.R.

1,

(recognizing

second

declining to

ascribe any

mortgage

make it "unreasonable to
see generally James F.
___ _________

5-6

(Bankr.

holder's

value to them

D.
bid-in

Mass.

1990)

rights

but

where circumstances

expect" creditor to exercise them);

Queenan, Jr., Standards for Valuation
_______________________

of Security Interests in Chapter 11, 92

______________________________________

____________________
through a pending sale.")
-99

Com. L.J.

18, 60

(1987) (real estate

mortgage holder's bid-in rights

"should

be valued as an inherent part of his property interest").

We
correctly

are

persuaded that

interprets the statute.

meaning to both sentences of

courts

the

to exercise

line of

cases

This interpretation gives

506(a), and enables bankruptcy

the flexibility

retaining collateral,

first

a Chapter

Congress intended.

11 debtor is

By

ensuring that

the very event Winthrop proposes to use to value the property

-- a

foreclosure sale -- will

time,

the debtor

valuing the

should

not take place.

not be

heard

At the same

to argue

collateral, the court should

that,

in

disregard the very

event that, according to the debtor's plan, will take place ____
- namely, the debtor's
income stream.
of

use of the collateral to

In ordinary circumstances

generate an

the present value

the income stream would be equal to the collateral's fair

market

value.

faithful
creditor's

to

Under
the

such circumstances,

dictates

interest

in

proposed post-bankruptcy
economic benefit

the

of

a court

506(a)
collateral

reality:

by

valuing
light

the

no foreclosure sale

and

from the collateral

equal to or greater than its fair market value.

allows the bankruptcy

court, using

the

of

for the debtor derived

in

remains

its informed

Our approach
discretion

and applying historic principles of

equity, to adopt in each

case

is

the

valuation

method

prevailing circumstances.

that

fairest

given

the

-1010

The interpretation championed by the second line of

cases

renders

meaningless.
to

the second

sentence

Moreover, it

506(a)

virtually

would allow a reorganizing debtor

reap a windfall by stripping down the lien to liquidation

value

and

quickly selling

the

value, thus pocketing equity

beyond reach save
Cf.
___

of

Butner
______

(bankruptcy

v.

collateral

at fair

market

that would have been completely

for the filing of the bankruptcy petition.

United States,
______________

law should

440

"prevent

U.S.

a party

48,

55

(1979)

from receiving

windfall merely by reason of the happenstance of bankruptcy")

(quotation

omitted).

to reorganize under

It is true that the debtor's intention

Chapter 11 is what

its going-concern value.

And

absent a reorganization plan,

gives the collateral

while it is

also true

that,

the creditor might not recover

the difference -- assuming that there is in fact a difference

-- between the
recoverable

collateral's fair market value and the amount

through

its

state

law rights,

we

would

not

characterize this additional recovery

certainly

not

as a "windfall" to the

creditor,

and

one that

will

spur

secured

creditors

to eschew their state law remedies and seek refuge

in the comfortable confines of the bankruptcy courts.

We
interpreted

find

that

506(a) as

among possible

the

bankruptcy

correctly

according it flexibility in choosing

standards of valuation,

the statute to the

court

and properly applied

particular facts of this case.

Winthrop

-1111

proposes

in its Plan to

continue

using it in its nursery and landscaping business to

generate

income.

bankruptcy court

In

retain control of

light

of

this

committed no error in

at its stipulated fair market value.

the Property and

proposed

use,

the

valuing the Property

-1212

IV.
IV.
___
CONCLUSION
CONCLUSION
__________
For

the

district court is
Affirmed.
Affirmed
________

foregoing

reasons,

the

order

of

the

-1313